"Counterproductive actions" hardship distribution provision, Anyone have experiences/thoughts about using this provision

[namealreadyinuse]

POSTED ON 401(k) BOARD YESTERDAY (but hardships may be appropriate here as well) -

Anyone have experiences/thoughts about adopting or administering this provision. We are worried about a run on hardship distributions if it makes it too easy to avoid plan loans.

Final 401(k) Reg Section 1.401(k)-1(d)(3)(iv)(D) provides "Employee need not take counterproductive actions. For purposes of this paragraph (d)(3)(iv), a need cannot reasonably be relieved by one of the

actions described in paragraph (d)(3)(iv)( C ) of this section [insurance reimbursement, asset liquidation, stopping elective deferrals, other currently available distributions and nontaxable loans] if the effect would be to increase the amount of the need. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing."

We have participants who can't afford loan repayments. They want to argue that loans would drain their cash flow and create more future hardships (or alternatively that loans would be defaulted and that would create tax liens and new hardshipt).

What do people think about how broadly to interpret this new provisions of the final regs?

[Dan]

This something that we do from time to time. If taking the non-taxable loan would create a hardship, then the plan trustee instructs us to process the hardship and forgo the loan. We just make a note in the file to that effect. The purpose of the requirement is to alleviate hardships in the least painful way possible.